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XTO Sees 21-23% Output Growth With Barnett Shale Acquisition

XTO Energy Inc., the fast-growing independent that began carving a niche in the Barnett Shale of North Texas three years ago, increased its natural gas-rich production forecast this year by 3% after announcing the purchase of a neighboring producer, privately held Antero Resources Corp., for $685 million.

Current production from Antero's 61,000 net acres is estimated at 60 MMcf/d, but XTO's engineers estimate proved reserves at 440 Bcf, 41% which are proved developed, with the upside potential for another 400-500 Bcf. XTO's reserve evaluation is based on the 61,000 net acres it is acquiring, with new well spacing defined at 100 acres. Following the announcement, XTO increased its production growth target in 2005 to 21-23%, up from 18-20%.

Antero received $337.5 million in cash,10 million shares of XTO common stock and warrants to purchase another 1.5 million shares.

"With this acquisition, XTO becomes a leading Barnett Shale producer for all the right reasons," said CEO Bob R. Simpson, who presided over a conference call with financial analysts on Tuesday. "We are purchasing an established base of production and reserves, while securing a unique acreage position in the core area that adjoins XTO's properties."

Simpson said that with XTO's well performance and technical assessment, "we see immense upside potential captured in the acquired properties. Our team envisions a program of steady low-risk drilling, healthy economic returns and expanding growth inventory. In short, we have added another vital development franchise for the future of XTO."

XTO expects to allocate $100 million to undeveloped leasehold acreage and seismic data, and it estimates that the price paid for the proved reserves is $1.33/Mcf. Development costs for the proved undeveloped reserves are estimated at $.96/Mcf. Including future drilling costs, the fully developed price paid increases to $1.90/Mcf, excluding any upside potential. XTO will operate 100% of the properties.

"Since our work [in the Barnett Shale] began in early 2004, we have gained ever increasing confidence that recovery of natural gas captured within the Barnett Shale will improve, ultimately leading to higher reserves," said Steffen E. Palko, XTO's president. "Horizontal wells and evolved fracturing techniques are showing consistent results in both the core and non-core areas. Seismic data is mitigating drilling risk. Re-fracturing existing wellbores is delivering significant production and reserve boosts. Finally, tighter well spacing will likely be required to access the abundant gas held in place. Together these factors point to opportunity, and our geoscience teams are primed for the challenge."

Keith A. Hutton, XTO's executive vice president of operations, said, "Given that our net position in the play is 148,000 acres and growing, we can now see 1 to 1.5 Tcf of reserve potential captured for the company in the Barnett Shale. By the end of next year, we expect to double our total production rate in the play to 160 Mcf of natural gas per day."

This transaction is expected to close on April 1. The Antero organization will continue to provide management and operational services through the end of June. After closing, Antero's executive management agreed not to compete with XTO in the Barnett Shale play for the next two-to-three years. Antero is selling its entire position in the Barnett Shale, but its management team said it would continue to develop its properties in other basins through Antero Resources II.

Following the announcement, Lehman Brothers' Jeffrey Robertson noted that Antero acquisition will establish the Barnett shale "as the primary growth driver for XTO, behind the Freestone Trend of East Texas." He said that more than 80% of the 61,000 acres acquired from Antero "are in the core area of the Barnett, where results have exceeded management's original assumptions."

Moody's Investors Service analysts said, "Though comparatively expensive by pre-2004 sector standards, the acquisition marks a substantial intensification of XTO's existing Barnett Shale holdings, particularly for its 'core area' Barnett holdings, creating a true core holding. The key risks in the transaction (high reliance on substantial future sustained drilling successes and high prices to meet return targets) are being adequately equity funded, ensuring both that XTO can continue to be opportunistic in its acquisition activity and that an appropriate amount of execution risk has been shifted to junior capital."

Moody's noted that with the transaction, "XTO believes that the Antero acquisition elevates it to being the second largest producer in the 'core' area of the Barnett Shale. To achieve its intended acquisition economics, XTO will need extended consistent drilling success across the play, strong natural gas prices, and supportable drilling and services costs."

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